Enterprise risk management is the process by which a company assesses and monitors risks from all corners of the business and then takes steps to increase the value of the company for its shareholders. Enterprise risk management is a guideline for most corporations and is used in the decision making process by management. Today’s business platform is different from the one in the past as it has become move volatile, unpredictable and complex. Since the dawn of time, business has been viewed as an evil that has to be controlled and regulated and the past scandals that rocked the business world such as Enron now demand a transparent assessment of risk to ensure such cases don’t happen again.
There are four types or risks involved in risk management and these include; Hazard risks which have been named in traditional risk management definitions such as fire and theft. Financial risks cover probable losses due to changes in the economy, commodity prices and foreign exchange rates. Operation risks deal with satisfying the customer’s needs and producing high quality products. Strategic risks look at methods of achieving completion in a process, innovation and manoeuvring around any regulations imposed by the government.
When a business is involved in financial risk management, it looks at what risks present opportunities and which are not profitable to the business. These variables that are looked at may be in the business or an external one. When done well, the risk assessment process empowers management to identify and evaluate the appropriate risks for the welfare of the business.
As part of the financial risk management process, banks have tightened securities lending due to the high risk of default. The economy is teetering on the brink of another recession due to poor job growth and the housing market is still not where it should be.
Securities lending may sometimes be considered when looking to mitigate risk in a firm. It involves lending of a security such as stock to another party. When a business is involved in securities lending, it has to put up collateral such as cash, stocks, bonds or letters of credit. Collateral management seeks to reduce risk in unsecured financial transactions and has evolved to accommodate growing technology and competition. In the modern world of business, collateral management involves tax treatments, credit risk, counter party credit limits and so on.
Enterprise risk management has grown mostly due to technology. The current computing power enables managers to analyze risks such as catastrophes that impact business and financial risks such as interest movements. Technology also gives managers access to historical information to determine trends and relationships between variables.
Financial risk management allows an investor to secure risk capital. This involves issuance of debt on which the repayment depends on a catastrophe in the future. This means that the debt is not paid if a catastrophic event were to occur. Investors therefore have to prepare for such situations by fully assessing these risks when investing their money. Insurers and risk managers have a significant role to play when it comes to risks in the finance world. Collateral management is also used to ensure that the risk of defaulting I lowered especially in a tough economy.
A company should be using an enterprise risk management solution when the business is involved in financial risk management; it should look at what risks present opportunities and which are not profitable to the business.